Discretionary Trust

valueman1

AnotherJoe said:

valueman1 said:

Shedman said:

valueman1 said:

Sherman - I would invest in an accumulating global index fund in equities with one of the large providers like Vanguard. It would be onshore. Ideally, one trustee would be an accountant, the other a lawyer, or at least one experienced in acting as a professional trustee and aware of the tax and regulatory issues.

OK.   Not sure if you are aware, but an issue that is likely to arise with using accumulation funds is that there will be 'notional distributions' (dividend income received by the fund added to the fund but not paid out as in Income funds) and which are reportable as income,  as I don't believe that a discretionary trust classifies as being exempt in same way that say ISA or SIPPS are.  This is therefore likely to require an annual trust income tax return which will either require to be prepared manually and submitted on paper return or online using commercial tax software as HMRC doesn't have an online self assessment module for trusts.   (By the way Trust income is taxable at 45% beyond £1000 income p.a. (20% up to £1000) or 38.1% (7.5% to £1000) if dividend income and the tax is payable out of the trust funds, which could mean having to sell some units to cover the tax due, and not from outside the trust otherwise it is regarded as a further addition to the trust)

(A further issue could be Capital Gains Tax on gains within the trust when Investments are sold)

I think the idea of having an trust accountant and a lawyer as Trustees is a noble intent but I doubt that would come cheap.  Unfortunately I fear a lot of trusts are set up with good intent but without the settlor realising the difficulties they create for the trustees (particularly after the settlor is dead).

Thanks for your comments.
Yes, I am aware of the ‘notional distributions’. However, I wasn’t aware of the level of income tax, that is high. Maybe offshore is the way to go but I imagine this would have its own set of issues. Do you have any experience of these? CGT is another consideration. Do you know what the rate is?

I’m inclined to agree that further to the comments on costs and complexities this may not be such a good idea. If I appoint accountants and lawyers the costs would be prohibitive and if I appoint a friend or relative it places a huge burden upon them. There does not appear to be any lower cost advisers who only specialise in trust management and are therefore familiar with the process and dealing with requests for funds day in and day out. That does surprise me given how common these are.

Most likely the reason is the need to cover themselves against being sued for being too restrictive not restricive enough not investing properly etc etc. Same as we see now with Db -> DC pension transfers where most advisers have stopped doing that busienss, its not worth the costs.

Surely they can get PI cover? Presumably if this was your specialism you would know the pitfalls, case law etc. and this would inform your approach.

valueman1

IanManc said:

valueman1 said:

Thanks for your comments.
Yes, I am aware of the ‘notional distributions’. However, I wasn’t aware of the level of income tax, that is high. Maybe offshore is the way to go but I imagine this would have its own set of issues. Do you have any experience of these? CGT is another consideration. Do you know what the rate is?

I’m inclined to agree that further to the comments on costs and complexities this may not be such a good idea. If I appoint accountants and lawyers the costs would be prohibitive and if I appoint a friend or relative it places a huge burden upon them. There does not appear to be any lower cost advisers who only specialise in trust management and are therefore familiar with the process and dealing with requests for funds day in and day out. That does surprise me given how common these are.

I'm glad that you're being more realistic. 

The sort of trust that you were considering, for the purpose you suggested, is not that common nowadays. Solicitors who prepare wills have been discouraging their use for years because they are tax inefficient, professional trustee costs are high and due to the professional risks involved you can struggle to get anyone to take on trusteeship at all. Usually they are only now included in the will of someone you would describe as an "insistent client" and the solicitor would note their file accordingly to protect themselves from future complaints.

As well as that, such a trust would not protect from what you see as the potential predations of a soon-to-be-ex-spouse of one of your children, as a divorce judge can take into account the potential for receipts from a discretionary trust or an inheritance in deciding how to divide marital property, and you can't avoid that.

You may prefer to enjoy a bit more of your money yourself, or use your allowances to give money to your children or grandchildren while you are alive so you can see them enjoying it.

Thank you for your intelligent response.

valueman1

Shedman said:

valueman1 said:

Sherman - I would invest in an accumulating global index fund in equities with one of the large providers like Vanguard. It would be onshore. Ideally, one trustee would be an accountant, the other a lawyer, or at least one experienced in acting as a professional trustee and aware of the tax and regulatory issues.

OK.   Not sure if you are aware, but an issue that is likely to arise with using accumulation funds is that there will be 'notional distributions' (dividend income received by the fund added to the fund but not paid out as in Income funds) and which are reportable as income,  as I don't believe that a discretionary trust classifies as being exempt in same way that say ISA or SIPPS are.  This is therefore likely to require an annual trust income tax return which will either require to be prepared manually and submitted on paper return or online using commercial tax software as HMRC doesn't have an online self assessment module for trusts.   (By the way Trust income is taxable at 45% beyond £1000 income p.a. (20% up to £1000) or 38.1% (7.5% to £1000) if dividend income and the tax is payable out of the trust funds, which could mean having to sell some units to cover the tax due, and not from outside the trust otherwise it is regarded as a further addition to the trust)

(A further issue could be Capital Gains Tax on gains within the trust when Investments are sold)

I think the idea of having an trust accountant and a lawyer as Trustees is a noble intent but I doubt that would come cheap.  Unfortunately I fear a lot of trusts are set up with good intent but without the settlor realising the difficulties they create for the trustees (particularly after the settlor is dead).

Thank you for this helpful note.

Malthusian

valueman1 said:

Surely they can get PI cover? Presumably if this was your specialism you would know the pitfalls, case law etc. and this would inform your approach.

PI cover isn't a licence to be negligent. I'm not a lawyer but in my experience of PI cover, even one claim can dramatically increase the costs of obtaining PI cover in the future or make it completely impossible. Or for high-risk business the excesses can be so high that the PI cover is effectively worthless.

Case law is not really the issue, if the trust is written to give the trustees absolute discretion then the trustees can do pretty much what they want. That doesn't make it any easier to deal with constant requests for large sums of money, weigh them against the interests of the other beneficiaries and deal with the inevitable complaints that follow the inevitable "no"s.

And lurking in the background is the fact that the best advice you can give the beneficiaries as their professional solicitor would be to wind the thing up, if it's legally possible. (For tax-efficiency and the reasons that dont_look_now gave if nothing else.)

Most parents want to leave their children assets, not debts. If a trust set up by my pa lends me £250k to buy a house then I may have a house slightly earlier than if I'd saved up myself and the loan may be interest-free, but that doesn't change the fact that what I have actually received from the trust is a £250k asset minus a £250k liability, i.e. nothing.

An interest-free loan is better than actual nothing, but it is not as valuable as what the vast majority of parents leave to their children, i.e. money.

valueman1

Malthusian said:

valueman1 said:

Surely they can get PI cover? Presumably if this was your specialism you would know the pitfalls, case law etc. and this would inform your approach.

PI cover isn't a licence to be negligent. I'm not a lawyer but in my experience of PI cover, even one claim can dramatically increase the costs of obtaining PI cover in the future or make it completely impossible. Or for high-risk business the excesses can be so high that the PI cover is effectively worthless.

Case law is not really the issue, if the trust is written to give the trustees absolute discretion then the trustees can do pretty much what they want. That doesn't make it any easier to deal with constant requests for large sums of money, weigh them against the interests of the other beneficiaries and deal with the inevitable complaints that follow the inevitable "no"s.

And lurking in the background is the fact that the best advice you can give the beneficiaries as their professional solicitor would be to wind the thing up, if it's legally possible. (For tax-efficiency and the reasons that dont_look_now gave if nothing else.)

Most parents want to leave their children assets, not debts. If a trust set up by my pa lends me £250k to buy a house then I may have a house slightly earlier than if I'd saved up myself and the loan may be interest-free, but that doesn't change the fact that what I have actually received from the trust is a £250k asset minus a £250k liability, i.e. nothing.

An interest-free loan is better than actual nothing, but it is not as valuable as what the vast majority of parents leave to their children, i.e. money.

A competent professional will get PI.  An experienced professional trustee will have experience of dealing with requests for funds and what is and isn’t realistic and how to say no.
What attracts me to the idea of the loan is that the money will return to the Trust in future to benefit future generations.  It will escape IHT because it is a loan not cash (although acknowledge tax liabilities within trust) and it is less vulnerable in the case of a divorce. Also, the money can’t be wasted on inappropriate things...